China underpins Norrhydro’s growth strategy

Norrhydro, a cylinder manufacturer, expands its operations in China. The company has received business partnership support from Finnpartnership.

Norrhydro’s roots are in Rovaniemi, Lapland but it now has production in China, too. The factory in Changzhou, financed by Finnfund, is an important part of the growth strategy of this Finnish cylinder manufacturer.
Established in 1985, Norrhydro has come to concentrate on producing cylinders for hydraulic equipment used in forest machines, ships, ports and mines.
Its main markets are in Finland and northern Europe but a few years ago it embarked on a plan to grow in the Far East.
“Our first step was to build a network of subcontractors in China,” says CEO Yrjö Trög. “We also meant to explore local production but the financial crisis of 2008 got in the way.”

Beginning with a partnership

Despite the delay in its plans, Norrhydro continued to study opportunities for expansion in China and concluded a partnership with a local company, Sunde Hydraulic.
Slightly smaller than Norrhydro, Sunde Hydraulic makes hydraulic cylinders in the city of Changzhou, 200 km west of Shanghai.
“The partnership has been a learning process that has taught us about Chinese practices and corporate culture.”
Trög advises others planning to set up in China to reserve plenty of time.
“Business arrangements in China are not concluded on the schedule that we are used to in Europe. It’s also important to build networks and develop personal relationships with customers and local officials.”
The Chinese market for hydraulic solutions has grown at an annual rate of 20-40 percent since 2000. It is expected to grow even faster in the years ahead.

Taking the next step

Norrhydro’s collaboration with Sunde Hydraulic proved unable to keep up with the demand so the Finnish company started planning its own production plant in the same town.
Trög says that construction moved ahead briskly and operations began in Changzhou in early 2012. But although it now has its own plant, the company still has some manufacturing at its partner’s factory.
“The partnership has been good for us but, at a time of rapid growth, we needed to have production entirely in our own hands. Now we can steer operations more effectively and make the investments required rapidly.”
Norrhydro’s main product in China is cylinders. Its factory is expected to be in full-scale operation in 2014 and will then employ 250.

China the best option

In the CEO’s view it was essential for Norrhydro to expand operations into China. The growing markets for hydraulics are in Asia.
“We need to be where our customers are. Our European customers are also expanding in China and want to use locally made cylinders.”
Meanwhile, the total size of the European market is hardly growing at all, he says.
“In Europe, producers are mostly fighting for market shares. On the other hand Asian markets are continuing to grow. By having production in China, we can get a share of this growth.”

New technology under development

Growth is an important part of Norrhydro’s strategy, but product development has a key role, too.
In partnership with Tampere University and others, it is developing an intelligent management system that will increase the effectiveness of hydraulic systems while reducing their energy demands and emissions.
“By applying digital technology to hydraulics we can cut power demands by up to 80 percent, so this is obviously a very significant innovation.”
Norrhydro has about 100 employees in Finland. The company’s turnover in 2011 was 14 million euros and it expects to reach 16 million this year.
Trög points out that production is not being shifted from Finland to China. The factory in Changzhou will make products for the Asian market while output from Finland goes to Europe.
“You can’t properly serve customers operating in Asia from Rovaniemi when it takes eight weeks to ship products to the Far East. The same is true in the other direction. Europe also needs producers close to the market.”

Support from Finnpartnership

When seeking partners for business operations in China, studying the project feasibility, drawing up a business plan, assessing environmental and social impacts, and training employees, Norrhydro received business partnership support from Finnpartnership.
“It is often difficult to become established in developing markets, as was the case here as well,” says Siv Ahlberg, programme director of Finnpartnership. “Not all companies have the resources to do it.”
She points out that, in addition to its developmental impact in China, Norrhydro’s investment will also have favourable consequences at home.
“A successful presence in a developing market can reinforce a company’s operations in Finland, too. In the best scenario, Asia will bring volume and leverage, helping to make it profitable to develop an energy-saving product in Finland.”

Project finance from Finnfund

Finnfund is financing Norrhydro’s Chinese plant with a loan. Trög says that Finnfund’s involvement was decisive.
“An investment in a developing country is a big thing for an SME and it’s difficult to get other domestic sources of finance interested. There are many risks in a project like this that private financiers don’t necessarily understand.”
Finnfund investment manager Jussi Tourunen sees the Norrhydro project as a good example of how Finnfund supports the efforts of Finnish SMEs to build up a presence in developing countries.
“It’s also a sign that Finnfund is still needed in more developed target countries like China.”
He says the main development impacts of the project are in knowledge transfer and job creation in China.
“Beginning local production is important for Norrhydro’s future, too. It will be valuable, for example, when the company has developed smart, energy-saving hydraulic equipment and brings it to markets in Asia.”

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